Generally speaking, as much as possible. You need to build a fund that you can draw on for a significant portion of your retirement income. Believe it or not, this may be possible if you start planning and building your retirement strategy early on. Contribute as much as you can to tax-advantaged savings vehicles [e.g., 401(k)s, IRAs, annuities]. Then round out your retirement portfolio with other investments (e.g., stocks, bonds, mutual funds). As you’re planning and saving, keep in mind that you may have 30 or more years of retirement to fund. So, you probably need an even bigger nest egg than you think.
Your particular circumstances will determine how much money you should save for retirement. Perhaps you have a pension plan, or your Social Security benefits will be large enough to support you. If so, you may not need to save as much as other people. Other personal factors will need to be considered. If you plan to retire early (e.g., age 50 or 55), you’ll have even more retirement years to fund and may need larger assets than someone who plans to work until age 65 or 70. Conversely, you may require fewer assets if you plan on working part-time during retirement.
Your projected expenses during retirement will also help determine how much money you’ll need and how much you need to save to reach that total. Certain costs (e.g., food, utilities, insurance) will be shared by almost all retirees. But you may still be saddled with retirement expenses that many retirees no longer have (e.g., mortgage payments or a child’s tuition). Expenses will also depend on the type of retirement lifestyle you want. How many nights a week will you dine out? How much traveling will you do? These kinds of questions will give you a better idea of how much money you’ll be spending once you retire.
Setting a withdrawal rate
The retirement lifestyle you can afford will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you withdraw from your portfolio, whether from returns or both returns and principal, is known as your withdrawal rate. Determining an appropriate initial withdrawal rate is important in retirement planning and can be challenging. Why? If you take out too much too soon, you might run out of funds in your later years. If you take out too little, you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of retirement, as it can impact how long your savings last.
In previous years, it was thought that a 4% annual withdrawal rate from a balanced portfolio of large cap equities and bonds could be sustainable. However, individuals may not be able to sustain a 4% withdrawal rate, or may even be able to support a higher rate, depending on their individual circumstances. The bottom line is that there is no standard guideline that works for everyone — your particular withdrawal rate needs to take into account many factors, including, but not limited to, your asset allocation and projected rate of return, annual income targets (accounting for inflation as desired), investment horizon, and life expectancy. 1
When planning for retirement savings, several key factors should be taken into consideration. Each individual’s goals are unique, depending on their financial objectives and circumstances. Schedule an appointment with an experienced Arvest Wealth Management client advisor. They can evaluate the appropriate factors and provide tailored suggestions based on your specific situation.
1 “The State of Retirement Income: Safe Withdrawal Rates,” Morningstar, 2021
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